China's ZTE slumps to quarterly loss, margins bleed

HONG KONG ZTE Corp, the world's fourth-biggest maker of mobile phones and fifth-ranked telecommunications equipment manufacturer, reported a $310 million quarterly net loss, its first since listing in Hong Kong in 2004, on shredded margins, project delays and accounting changes in China.

Shenzhen-based ZTE, led by Shi Lirong, had previously warned its quarterly loss could be as much as 2 billion yuan - eight times its first-half profit - triggering a 16 percent drop in its stock price on October 15, a self-imposed 50 percent pay cut by executives, and warnings from Fitch ratings agency.

In the third quarter of last year, ZTE made a profit of 299 million yuan.

"Things should move up from here, in terms of profitability and margins. We have to watch whether their telecom equipment business overseas picks up," said Michael Li, an analyst with Everbright Securities in Hong Kong.

ZTE has also faced accusations in a U.S. Congress committee report this month that it - and local rival Huawei Technologies Co Ltd - is a potential cyber security threat. Both ZTE and Huawei deny the committee's allegations.

Telecoms gear contributes about half of ZTE's total sales, while consumer devices - handsets, tablets and dongles - make up about a third. The company, which employs more than 80,000 people, generates more than half its revenues outside China.

ZTE recently sold a majority stake in ZTE Special Equipment Co (ZTEsec), a business that sells surveillance systems to governments and law enforcement agencies.

An investigation by Reuters earlier this year found that ZTE had sold to Iran's largest telecoms firm a powerful surveillance system capable of monitoring landline, mobile and internet communications. Reuters also reported that ZTE had sold or agreed to sell Iran embargoed U.S. computer equipment. The company said later it was curtailing its business in Iran and had stopped looking for new customers there.

FULL-YEAR PROFIT

Earlier this month, ZTE blamed its forecast third-quarter loss on delays in some international telecom projects and a large number of low-margin contracts in Europe and Asia, but said it expected to be profitable for the full year.

Net profit for the full year is forecast at around 642 million yuan, according to a mean forecast from a Reuters poll of 11 analysts since the company's mid-October profit warning.

"The company's fundamentals are not so strong and transparency is also a concern," said a fund manager, who was not authorized to talk to the media, so didn't want to be named.

ZTE, which competes with Ericsson, Alcatel-Lucent SA and Nokia-Siemens in providing equipment to telecom carriers, has been frustrated by project delays in the high-margin African market, while sales in Europe have slowed due to the broad debt crisis there.

CHINA MOBILE HOPES

Like many in the consumer gadget business, ZTE wants to move up the smartphone value chain with higher-end models like its Grand series, but remains way behind Samsung Electronics Co Ltd and Apple Inc in consumer recognition.

ZTE shipped 8 million smartphones in April-June and analysts said executives told them shipments would be around 25 million this year, lower than earlier targets.

Analysts say ZTE should benefit from China Mobile Ltd's expected spending next year to develop its 4G network.

ZTE shares have more than halved this year, dropping the firm's market value to below $5 billion. The benchmark Hang Seng stock index has gained almost 18 percent over the same period, while the CSI 300, made up of leading Shanghai and Shenzhen shares, is down 2 percent.

ZTE has switched to a stricter way of logging new contract revenues in its home market. It previously signed procurement contracts with carriers' provincial branches, but now also requires agreements with their head offices, increasing the time needed to seal some deals, analysts said.